Federal gift and estate taxes are taxes that are imposed on individual(s) by the federal government when an individual(s) transfers property to another person. When property or assets are transferred while the transferor or donor is still alive, then a gift tax may be imposed.
Alternatively, if property or assets are transferred to another individual upon the death of the transferor, then an estate tax may be imposed. Whether or not the gifts that you make or the estate that you leave behind will be subject to federal taxation depends on the amount of the gift or the estate, and both taxes will be discussed in more detail below.
As mentioned above, an estate tax is a tax on your right to transfer property at your death. Estate taxes can be as high as 40% of the total value of an estate. As of 2019, federal estate taxes may be imposed on an estate by the federal government. However, this can only happen if the gross value of the estate is greater than the federal personal estate and gift tax exemption, which is $11.4 million for an individual or $22.8 million for a married couple.
In addition to the personal estate tax exemption, there is also a marital deduction, which allows for a decedent’s (the person who has died) estate to pass tax free to their surviving spouse. This also can happen as long as the property is directly transferred to the surviving spouse upon the decedent’s death.
As can be seen, it is important to make sure that the gross value of your estate does not exceed the estate and gift tax exemption. The gross value of an estate is calculated by adding up the total value of all property and assets left at the time of an individual’s death. This may include:
- Money held in bank accounts;
- Life insurance; or
- Real estate.
Historically, the number of estates subject to estate taxes were higher, as the exemption amount was $675,000 in the year 2000 (over 50,000 estates were taxable in 2000). Today, most estates, whether an individual and married couple, are not subject to federal taxation, meaning you will be able to transfer your estate free from any federal taxes. However, according to federal data, there were still 1,890 taxable estates in 2018.
Estate taxes must be filed upon the death of the decedent by the personal representative or executor of the estate within 9 months from the date of the death. If the estate is taxable, the taxes must be paid within this 9 month period. However the period for paying federal estate taxes may be extended in certain circumstances.
Additionally, it is important to note that around 12 states and the District of Columbia impose their own estate taxes. Thus, it is important to not only research federal gift and estate tax laws, but your local state’s gift and estate tax laws as well.
Federal gift taxes are taxes on the transfer of property from one individual to another, where the donor receives nothing, or even something less than full value in return. It is important to note that federal gift tax applies regardless of a donor’s intent. This means that whether or not a donor intends for the transfer of a property or asset to be a gift does not matter in the eyes of the federal government. Instead, the donor is the individual generally responsible for paying the tax.
However, there are some gifts that are exempt from the federal gift tax, including:
- Gifts made that are not greater than the annual exclusion amount for the year, meaning less than $15,000 to any one individual ($30,000 for married couples);
- Gifts made to a spouse;
- Gifts made to pay for tuition or medical expenses of another person, known as educational and medical gift exclusions;
- Gifts made to a political organization; and
- Gifts made to qualifying charitable organizations.
Importantly, with the annual exclusion amount, you are allowed to make more than one $15,000 gift. This is because the annual exclusion provision allows you to make multiple gifts to as many people as you want. For example, if you have 10 grandchildren, you may gift them each $15,000, a total of $150,000, without having to worry about any federal gift tax.
However, if you go over the allowed annual exclusion amount to one person, you will likely still not have to pay a federal gift tax. This happens because the amount that exceeded the $15,000 will simply be added to the $11.4 million lifetime estate and gift tax exemption amount.
As can be seen, navigating federal gift and estate tax laws is often a difficult task to accomplish alone. Thus, it is important to consult with a knowledgeable and well qualified estate attorney near you in order to ensure that your estate or gifts will not be subject to federal taxation. Additionally, an experienced estate attorney will be able to assist you in other estate planning matters, such as drafting a will or creating a living trust in order to avoid taxation.